Part 2 – The accumulation of debt: Fiat and The Fed (Tax, Borrow, Print, Repeat)

…cherish public credit. One method of preserving it is to use it as sparingly as possible…avoiding likewise the accumulation of debt…not ungenerously throwing upon posterity the burthen, which we ourselves ought to bear.

Of all the warnings George Washington left in his Farewell Address, none seems more painfully obvious than those relating to the public debt. After all, it doesn’t take an economist to understand it is not a very good idea to owe more money than you have coming in.

It has, however, been widely accepted for a great many years now that our nation must run deficits in order to sustain our financial needs. This shift in economic policy can be traced back historically to a political and overall philosophical change in defining what the role of our government is and ought to be. While the complete history is a long and messy one, the roots of our current financial mess can be found at the beginning of the 20th century.

In 1913, Congress passed the Federal Reserve Act, which established The Fed as the central bank of the United States and began our country’s transition from a hard currency based on gold and silver to a system known as fiat—or, “by decree”. The Fed thus became the nation’s issuer of money and credit, able to supply unlimited amounts of cash backed by nothing more than the country’s own “faith” in its currency.

The significance of this move cannot be overstated. It was a change so drastic, in fact, President Woodrow Wilson, who signed the act into law, later wrote in regret that he had “unwittingly destroyed” his country, leaving behind a government run “by the opinion and duress of a small group of dominant men.” And indeed, The Fed is just that—a small, private, unaccountable, unelected, undisclosed group of bankers, who own and control our country’s supply of money. And as President James A. Garfield said in 1881, “He who controls the money supply of nation controls the nation.”

As the country moved through the century, and politicians dreamed up more and more ways of spending the public nickel, it became all the more necessary to rely on The Fed for support. When government can no longer depend on the public through direct taxation for funds, or borrow any more money (today mostly from countries like China, which holds over $1 trillion in U.S. notes), there is no need for politicians to curb their spending—they can simply ask The Fed to turn their magical dollar printing machines back on. Just like that—money out of thin air.

This system—tax, borrow, print, repeat—is what allows our government, in the short-term, to finance any program it chooses. Politicians can dole out special favors or kickbacks to their districts, promise limitless social welfare, promote perpetual war all over the world, and never worry about the bill. After all, fiat money is never ending—until, of course, it isn’t.

The effects of this system have really begun to show within the last 40 years, beginning largely in the 1970’s with the end of the Bretton Woods Agreement, severing our economy’s last ties to the gold standard. The natural consequence of frequently increasing the money supply has been an accelerated rate of inflation—the hidden tax, causing the value of the dollar to plummet and the cost of goods and services to rise.

The inflationary effects of fiat money are not immediately felt, benefiting those who are able to spend the newly printed dollars first—bankers, and their friends in government—while the money still has its full value. By the time ordinary Americans (namely the poor and middle class) see this new money, it has lost most of its value, due to the inevitable rise in prices, and the rise in public debt.

The national debt currently sits at a staggering $15 trillion, or almost $50,000 per citizen. Unfortunately, and paradoxically, the larger and more “out of this world” the number gets, the less “real” it seems, and the more ordinary citizens seem to passively accept the idea of our politicians spending us and our posterity into hock.

While there has been a sort of awakening in the last few years regarding the Federal Reserve banking system, most Americans still do not even know that the Federal Reserve is in not a governmental entity—the running joke, being the “Federal Reserve is as federal as Federal Express”.

Without the Fed, and its ability to print endless amounts of dough, it would be impossible to sustain the “overgrown military establishment”, of which Washington also warned. Our current foreign policy of endless militarism and intervention all over the world is thus intrinsically tied to our economic policy of endless cash and credit, passing the debt along to the next generation of Americans.

The problem with raising issues regarding the Federal Reserve, its shadowy practices, and its’ privately held, undisclosed list of owners, is that those who find these issues uncomfortable will generally dismiss it to the corner of kooky “conspiracy theory”. The painful truth, however, is that the Federal Reserve and its operations are very real and far from theory. Whether or not their actions constitutes conspiracy—that is to say, an agreement between two or more individuals or groups of individuals to commit a crime, fraud, or other wrongful act—is a matter long overdue for public debate.